Changes the Republican Party is looking to make to the tax code could shift the calculus for people considering buying a second home.
As part of their tax code overhaul, Republican lawmakers have taken aim at the mortgage interest deduction. While the deduction will be retained, they plan to modify it substantially — and some of the proposed changes would squarely hit people who own second or vacation homes.
Under the proposed legislation, people with a second home will no longer be able to deduct the interest paid on a mortgage for that property. Currently, people are allowed to deduct mortgage interest paid on two properties up to $1 million in debt.
Additionally, the new provision would no longer allow taxpayers to deduct interest paid on home equity loans. Taxpayers currently can deduct interest on up to $100,000 in home equity indebtedness. This change appeared likely to limit a popular strategy among vacation-home buyers — taking out a home equity loan on their primary residence to fund a down payment on a vacation property or pay for it outright.
As with other changes made to the tax code, it appears that the new provisions will only apply to people who finance the purchase of a second home in the future. And people who own a second home should be able to continue deducting what they pay in property taxes for their additional home. Still, these changes will alter how financially feasible owning a vacation home might be.
This change doesn’t just impact wealthy people
While vacation homes might be more commonly associated with people who live lavish lifestyles, these changes will hit middle-class homeowners too. “It’s not as sympathetic a cause as impacting your traditional owner-occupant, but it is a very real aspect of what’s going on,” said Rick Sharga, executive vice president of online real-estate marketplace Ten-X.
The median income of vacation-property buyers in 2016 was $89,900, according to data from the National Association of Realtors, which was significantly higher than the median among people who were buying homes they would primarily live in ($75,000).
Still, the vast majority of vacation property buyers don’t necessarily live the lifestyles of the rich and famous: Only 34% of vacation-home buyers have a household income of more than $100,000 annually, while 10% earned less than $45,000 a year.
Consequently, critics of the changes made to the mortgage interest deduction argued that the new provision was still more likely to affect middle-class folks even in the vacation-home market. “They’re the ones who really needed that deduction,” said Brian Koss, executive vice president at Mortgage Network, a lender headquartered in Danvers, Mass.
Not all vacation communities will be affected equally
Real-estate experts have argued that the changes Republicans have proposed could depress home prices in some housing markets if they became law —at least in the short-term. And that theory applies to vacation communities, too.
But don’t expect to see the poshest getaways being the hardest hit by this change, Koss said. “Your really high-end vacation areas aren’t going to feel the pinch,” Koss said. “It’s not going to be Aspen and Nantucket, it’s going to be the Jersey Shore.”
Consequently, the new tax plan could depress sales in some of these markets at a time when sales have already suffered because of rising home prices. Vacation-home sales have already taken a hit in recent years: The share of vacation-home buyers dropped for the third straight year in 2016 to 12% from 16% the year before, according to data from the National Association of Realtors.
The market-related effects the tax plan could have won’t just affect vacation-home buyers though — it could also extend to those who live year-round in these communities.
People looking to offset these tax-code changes need to be careful
Though mortgage financing is less common among vacation property buyers, it’s still important to this market. Nearly a third of vacation-home buyers (28%) didn’t use a mortgage, versus just 13% of those who were purchasing a primary residence.
Experts predicted that some people considering buying a second home might consider alternative means of offsetting the costs of a mortgage. “This change doesn’t necessarily apply to homeowners who have a second home that they rent out the majority of the time,” said Danielle Hale, chief economist at Realtor.com. “It might cause more people to shift to rent those types of properties.” (Realtor.com is operated by News Corp subsidiary Move Inc., and MarketWatch is a unit of Dow Jones, which is also a subsidiary of News Corp.)
Homeowners considering listing their vacation property on a site like Airbnb could quickly find themselves in a taxation quagmire if they’re not careful. People who own a second home can rent it out for up to 14 days each year without needing to pay taxes on the rental income, according to HouseLogic. After that point, what they earn from renting would be taxable.
Some owners might see greater deductions if they classify their home as a business property — particularly because they could write-off expenses related to renting it out including utilities, repairs and insurance.
There’s a trade-off to this strategy though: Homeowners need to be careful that they don’t stay at the home too often. These individuals need to restrict personal use of their property to fewer than 15 days or 10% of the total number of days they rent it out, whichever is more, according to HouseLogic. If they stay longer than that, the Internal Revenue Service will consider it a personal property, meaning they’d be on the hook for taxes on their rental income and be limited to state and local property taxes as their only deduction.
So, you’ve been searching for that perfect house to call a ‘home,’ and you finally found it! The price is right, and in such a competitive market, you want to make sure that you make a good offer so that you can guarantee that your dream of making this house yours comes true!
Freddie Mac covered “4 Tips for Making an Offer” in their Executive Perspective. Here are the 4 tips they covered along with some additional information for your consideration:
1. Understand How Much You Can Afford
“While it’s not nearly as fun as house hunting, fully understanding your finances is critical in making an offer.”
This ‘tip’ or ‘step’ should really take place before you start your home search process.
Getting pre-approved is one of many steps that will show home sellers that you are serious about buying, and will allow you to make your offer with the confidence of knowing that you have already been approved for a mortgage for that amount. You will also need to know if you are prepared to make any repairs that may need to be made to the house (ex: new roof, new furnace).
2. Act Fast
“Even though there are fewer investors, the inventory of homes for sale is also low and competition for housing continues to heat up in many parts of the country.”
The inventory of homes listed for sale has remained well below the 6-month supply that is needed for a ‘normal’ market. Buyer demand has continued to outpace the supply of homes for sale, causing buyers to compete with each other for their dream homes.
Make sure that as soon as you decide that you want to make an offer, you work with your agent to present it as soon as possible.
3. Make a Solid Offer
Freddie Mac offers this advice to help make your offer the strongest it can be:
“Your strongest offer will be comparable with other sales and listings in the neighborhood. A licensed real estate agent active in the neighborhoods you are considering will be instrumental in helping you put in a solid offer based on their experience and other key considerations such as recent sales of similar homes, the condition of the house and what you can afford.”
Talk with your agent to find out if there are any ways that you can make your offer stand out in this competitive market!
4. Be Prepared to Negotiate
“It’s likely that you’ll get at least one counteroffer from the sellers so be prepared. The two things most likely to be negotiated are the selling price and closing date. Given that, you’ll be glad you did your homework first to understand how much you can afford.
Your agent will also be key in the negotiation process, giving you guidance on the counteroffer and making sure that the agreed-to contract terms are met.”
If your offer is approved, Freddie Mac urges you to “always get an independent home inspection, so you know the true condition of the home.” If the inspector uncovers undisclosed problems or issues, you can discuss any repairs that may need to be made with the seller, or cancel the contract.
Whether you’re buying your first home or your fifth, having a local professional on your side who is an expert in their market is your best bet in making sure the process goes smoothly. Happy House Hunting!
In many markets across the country, the number of buyers searching for their dream homes greatly outnumbers the number of homes for sale. This has led to a competitive marketplace where buyers often need to stand out. One way to show you are serious about buying your dream home is to get pre-qualified or pre-approved for a mortgage before starting your search.
Even if you are in a market that is not as competitive, knowing your budget will give you the confidence of knowing if your dream home is within your reach.
Freddie Mac lays out the advantages of pre-approval in the ‘My Home’ section of their website:
“It’s highly recommended that you work with your lender to get pre-approved before you begin house hunting. Pre-approval will tell you how much home you can afford and can help you move faster, and with greater confidence, in competitive markets.”
One of the many advantages of working with a local real estate professional is that many have relationships with lenders who will be able to help you with this process. Once you have selected a lender, you will need to fill out their loan application and provide them with important information regarding “your credit, debt, work history, down payment and residential history.”
Freddie Mac describes the ‘4 Cs’ that help determine the amount you will be qualified to borrow:
- Capacity: Your current and future ability to make your payments
- Capital or cash reserves: The money, savings, and investments you have that can be sold quickly for cash
- Collateral: The home, or type of home, that you would like to purchase
- Credit: Your history of paying bills and other debts on time
Getting pre-approved is one of many steps that will show home sellers that you are serious about buying, and it often helps speed up the process once your offer has been accepted.
Many potential home buyers overestimate the down payment and credit scores needed to qualify for a mortgage today. If you are ready and willing to buy, you may be pleasantly surprised at your ability to do so as well.
So, you’ve decided to sell your house. You’ve hired a real estate professional to help you with the entire process, and they have asked you what level of access you want to provide to potential buyers.
There are four elements to a quality listing. At the top of the list is Access, followed by Condition, Financing, and Price. There are many levels of access that you can provide to your agent so that he or she can show your home.
Here are five levels of access that you can give to buyers, along with a brief description:
- Lockbox on the Door – this allows buyers the ability to see the home as soon as they are aware of the listing, or at their convenience.
- Providing a Key to the Home – although the buyer’s agent may need to stop by an office to pick up the key, there is little delay in being able to show the home.
- Open Access with a Phone Call – the seller allows showings with just a phone call’s notice.
- By Appointment Only (example: 48-Hour Notice) – Many buyers who are relocating for a new career or promotion start working in that area prior to purchasing their home. They often like to take advantage of free time during business hours (such as their lunch break) to view potential homes. Because of this, they may not be able to plan their availability far in advance or may be unable to wait 48 hours to see the house.
- Limited Access (example: the home is only available on Mondays or Tuesdays at 2pm or for only a couple of hours a day) – This is the most difficult way to be able to show your house to potential buyers.
In a competitive marketplace, access can make or break your ability to get the price you are looking for, or even sell your house at all.
The current narrative is that home prices have risen so much so that it is no longer a smart idea to purchase a home. Your family and friends might suggest that buying a home right now (whether a first-time home or a move-up home) makes absolutely no sense from an affordability standpoint. They are wrong!
Homes are more affordable right now than at almost any time in our country’s history except for the foreclosure years (2009-2015) when homes sold at major discounts. As an example, below is a graph from the latest Black Knight Mortgage Monitor showing the percentage of median income needed to buy a medium-priced home in the country today in comparison to prior to the housing bubble and bust.
As we can see, the percentage necessary is less now than in those time periods.
The Mortgage Monitor also explains that home affordability is better today than it was in the late 1990s in 47 of 50 states.
Your friends and family have your best interests at heart. However, when it comes to buying your first home or selling your current house to buy the home of your dreams, getting the whole story from a real estate professional is crucial.
With residential home prices continuing to appreciate at levels above historic norms, some are questioning if we are heading toward another housing bubble (and subsequent burst) like the one we experienced in 2006-2008.
Recently, five housing experts weighed in on the question.
Rick Sharga, Executive VP at Ten-X:
“We’re definitely not in a bubble.”
“We have a handful of markets that are frothy and probably have hit an affordability wall of sorts but…while prices nominally have surpassed the 2006 peak, we’re not talking about 2006 dollars.”
Christopher Thornberg, Partner at Beacon Economics:
“There is no direct or indirect sign of any kind of bubble.”
“Steady as she goes. Prices continue to rise. Sales roughly flat.…Overall this market is in an almost boring place.”
Bill McBride, Calculated Risk:
“I wouldn’t call house prices a bubble.”
“So prices may be a little overvalued, but there is little speculation and I don’t expect house prices to decline nationally like during the bust.”
David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices:
“Housing is not repeating the bubble period of 2000-2006.”
“…price increases vary unlike the earlier period when rising prices were almost universal; the number of homes sold annually is 20% less today than in the earlier period and the months’ supply is declining, not surging.”
Bing Bai & Edward Golding, Urban Institute:
“We are not in a bubble and nowhere near the situation preceding the 2008 housing crisis.”
“Despite recent increases, house prices remain affordable by historical standards, suggesting that home prices are tracking a broader economic expansion.”